Thursday, June 02, 2022

Food Speculators and Profiteers

 Investors trying to make money off the high demand for food. As food prices rose and war broke out in Ukraine, investors looking for a sure bet flocked into food commodities. The trend could be pushing prices up even further for the world's poor.

After the war broke out in February, commodity-linked "exchange-traded funds (ETFs)," a type of investment fund open to the public, saw a huge uptick in activity: By April, investors had pumped $1.2 billion (€1.12 billion) into two major agricultural ETFs, compared to just $197 million for the whole of 2021.

The Paris milling wheat market, the benchmark for Europe, has also seen a significant increase in the share of speculators — that is, investors whose primary aim is to turn a profit — buying up its wheat futures contracts. That's in place of commercial traders or hedgers, i.e. market players who have an interest in buying the commodity itself, for example to secure a wheat supply for a bread factory. 

Activity at the Chicago Board of Trade, one of the world's leading futures exchanges, also reflects this trend. A recent study by the Center for Development Research (ZEF) at the University of Bonn found that the share of speculators in hard wheat and maize had risen with the price of the commodities, and that it had gone up sharply since the end of 2020. The researchers also found that the volatility of futures prices had increased significantly since the end of 2021, a sign of market irregularities that can lead to excessive speculation.

In April, analysts at investment bank JPMorgan Chase suggested that commodities prices could surge as much as 40% as traders pile in, creating an attractive return for investors.

Traders tend to move away from riskier investments, like tech stocks and cryptocurrencies, in times of economic uncertainty, favoring safer bets, like food and other hard commodities, like oil and fertilizer. Food commodities, like wheat, corn and rice, can also be adversely affected by market uncertainty.

"The more uncertainty in the market, the more demand for risk trading exists," Lukas Kornher, economist and ZEF project manager, told DW. "That is why we see the influx of speculative traders in the market....Speculative traders basically try to jump on a bandwagon of increasing prices," said Kornher. "And then they start trading with each other instead of meeting the hedging demand of commercial producers or traders."

The current price inflation and record-high prices at the commodities futures markets signal an expected scarcity within a couple of months, according to Kornher, who said the world was likely "on its way" to a food crisis.

Investors cash in on food commodities as the poor go hungry | Business | Economy and finance news from a German perspective | DW | 02.06.2022

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